Making a ‘safe’ haven safer

With the effects of the global financial crisis now being felt so widely across most industries, private equity investors have a tough question to answer: Where is safe? Every day, it seems, we hear of the latest consequences of the bursting bubble that has sent waves spreading in all directions.

As many private equity funds adjust to a longer-term focus, infrastructure assets and businesses are certainly one possible safe haven. The two factors driving this are the relative insulation to short-term drops in demand in areas such as transportation, energy and utilities; and the renaissance of Keynesian thinking around the world as the Obama administration and others pump billions of dollars into infrastructure initiatives.

As with any downturn, this is also a time of opportunity and, given the unique combination of economic and environmental pressures facing the globe, this may also be the decade in which a green infrastructure sector reaches its own tipping point and finally flourishes.

Some problems exist, however, especially for those that in recent years have invested heavily to diversify their infrastructure businesses into value-adding service propositions.

Utility firms that provide financial services to their retail customers, oil and gas businesses that transformed their petrol forecourts to offer high-street, high-end food markets, and rail firms offering luxury travel services may find that previous business cases for these “game-changing” innovations may no longer stack up as consumer confidence and demand shrinks.

In the new post-credit crunch world, profitability is also no longer a guarantee of long-term success. Evidence over recent months suggests that a large proportion of recently purchased infrastructure companies are struggling with high levels of debt. Some reports suggest that as many as half of the companies owned by private equity firms may default on their debt within the next three years.

Given this, the current market may present an ideal opportunity for those with cash or access to funds to snap up businesses that are faring less well, provided they are clear about their long-term goals for the business, can securely service or restructure any acquired debt, and are prepared to take a more activist role in these businesses in the coming years. Acquiring the distressed asset can work well, provided you can fix it before it takes you down with it.

Transport and infrastructure can be one of the safer havens for private equity in the coming years, but there are ways to make it even safer. Some things to consider:

  • Focus on core activities, using access to cheap capital to invest in growth. Loans may be scarce but investment in solid businesses is possible if the strategy is clear, and skilled resources are on tap to execute it quickly;
  • Sharing services is hardly a new concept, but reducing costs to increase investment attractiveness could yield significant benefits. Not only will this benefit cashflow, it will also improve the chances of an influx of capital for growth;
  • “Buy and build” will be coming back into fashion as investors look for additional opportunities for rapid bottom-line and cashflow improvements across the portfolio. Look for businesses that provide straightforward ways to improve their performance through post-deal restructuring or divestment;
  • Conversely, now is not the time to be struggling to resolve deep-seated cultural differences or other long-term value eroders when acquiring a business. Any dip in performance or management attention is likely to cause investor jitters in the current climate. This can be avoided by expert target selection and integration/restructuring planning, and will be essential to retain shareholder support;
  • Money from government bodies is likely to bring increased regulatory or fiscal interest in the beneficiaries. If the UK follows the US and invests heavily in transport and infrastructure projects, investors should be prepared for increased government involvement, and have the skills, resources and patience to work in this more regulated, more political, and more publicly exposed environment.

Peter Westwood is a former Director of E.ON, and member of Beyond the Deal, a business that focuses exclusively on post-deal integration and restructuring. Peter can be contacted at peter.westwood@beyondthedeal.com